A3.2 Pension Reform in an Aging Japan

Until the 1980s, Japan’s population was relatively young and although the Japanese enjoyed significant longevity by world standards, public pension programs needed to cover relatively few people. However, demographic and economic factors have imposed greater stress on the programs (see Takayama 1998; Hatta and Oguchi 1997, 1999; and Oshio 2002).

Substantial increases in the contribution rate of the EPI (and NP) are required to support currently legislated benefits, assuming that the normal retirement age (which was 60 and is being increased to 65) and benefits remain unchanged.

The existence of a reserve could mitigate future financial difficulties for the EPI. From the beginning, EPI contributions have been accumulated in a reserve that has been invested in government bonds issued for public works projects. However, these reserves have begun to diminish, and may disappear in the late twenty-first century, unless contributions are raised further. The current reserve no longer provides a substantial cushion for the EPI.

Japan has experienced progressive aging, a trend that is set to continue for a long time. Such aging reflects fertility rates that are below the replacement level and the trend of continually increasing longevity. Thus, if actual benefits are to be maintained, premiums must be raised.

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